The Big Three Sustainability Frameworks

Global shift in ESG reporting reporting

In response to growing demands for greater transparency in Environmental, Social, and Governance (ESG) matters from investors and stakeholders, major regulatory bodies and standard setters worldwide introduced significant ESG reporting proposals in 2022. These pivotal initiatives, known as the "Big Three," include the European Union's Corporate Sustainability Reporting Directive (CSRD), the International Sustainability Standards Board (ISSB) on an international scale, and the United States Securities and Exchange Commission's (SEC) proposal.

The European Union's CSRD: Elevating ESG Reporting

The European Commission, European Parliament, and the Council of the European Union led the way by establishing the CSRD. Driven partly by the European Green Deal, a comprehensive set of policies aimed at achieving climate neutrality by 2050 and protecting Europe's natural environment, the CSRD expands on the existing Non-Financial Reporting Directive (NFRD). It encompasses a broader range of companies and imposes more detailed ESG reporting requirements. While the CSRD was adopted in November 2022, it came into effect on January 5, 2023, with EU Member States given 18 months to incorporate its provisions into national law.

The International Sustainability Standards Board (ISSB): A Global Perspective

Announced during COP26 in November 2021, the ISSB operates alongside the International Accounting Standards Board (IASB) under the governance of the IFRS Foundation. The ISSB's mission is to develop global sustainability disclosure standards aligned with the needs of capital markets. It released its first two final standards in July 2023, focusing on climate-related and general sustainability disclosures. These standards are effective for reporting periods beginning on or after January 1, 2024, marking a significant step toward global ESG reporting consistency.

SEC's Proposal: Enhancing Climate Disclosure

In response to growing public discourse on climate change, the SEC issued a proposal in March 2022 to significantly enhance climate-related disclosures in annual filings and registration statements. The proposal targets the identification, assessment, management, and disclosure of climate risks, as well as their financial impact, greenhouse gas emissions, and transition activities. While the final rule was initially expected in late 2022, it is now anticipated in 2023, along with a proposal for enhanced human capital disclosures.

California's Climate Disclosure Bills: Pioneering Change

California's State Senate introduced the Climate Accountability Package, including bills for GHG emissions reporting and climate-related financial risk reporting. If signed into law by the California Governor before October 14, 2023, these bills will impact over 10,000 US companies, both public and private, including subsidiaries of non-US headquartered firms. These companies will be required to disclose climate-related information starting in 2026 for fiscal 2025, aligning with global ESG reporting trends.

Final Thoughts

The SEC's sustainability proposal is still pending, while the ESRS and IFRS Sustainability Disclosure Standards have been finalized. Stakeholders emphasize the need for international collaboration and consistency across these frameworks, but it remains uncertain how the SEC will address interoperability and equivalence. California's climate disclosure bills, if signed into law, will encompass more companies than the SEC proposal and could accelerate climate reporting. These bills allow companies to fulfil reporting requirements using disclosures prepared for other reporting standards, including IFRS Sustainability Disclosure Standards. Stakeholders should monitor developments in sustainability disclosures beyond climate, as various standard setters are entering the conversation. Preparing for new reporting requirements may take a year or more, depending on readiness and the number of applicable regimes, making it crucial to understand their scope and potential impact.